Compensation:

Compensation is the methods and practices of

maintaining balance between interests of operating the
company within the fiscal budget and attracting,
developing, retaining, and rewarding high quality staff
through wages and salaries which are competitive with
the prevailing rates for similar employment in the
competitive markets. It is the cornerstone of an effective
talent management strategy.
Compensation strategies can affect many facts of the
business. Such as;
Improved employee morale and retention
Increased employee engagement and productivity
Strengthened governance and compliance with
company vision and mission
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Compensation
The Compensation model should be closely knitted with following
Model
three elements i.e.
Management Strategy
Compensation Plan Design
Performance

Management
Strategy:
This relates to the basic existence of any organization its
objectives and goals i.e. vision and mission of the
enterprise, for which human resources are hired, and the
organization pays to its employees to keep them
motivated for accomplishing those set objectives in a cost
effective manner.Plan Design
Compensation
Compensation Plan
Design

Job Analysis

Job Description

Market Wage Survey

Job Evaluation

Pay Structure
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Market Wage
Surveys
The goal of labor market

wage surveys is to find data from

employers with whom the organization competes for
employees. Once the data has been collected, it must be
analyzed. The simplest analysis involves comparing the going
market rate and approximating this rate within the
organization's own pay structure.

Methods of Wage
Surveys

Generally three methods are employed for wage surveys;

Personal Interviews
Mailed Questionnaires
Telephone Inquiries

Pay Structure
The basis for most pay programs is a pay structure - a hierarchy
of jobs with pay ranges and/or rates assigned. Pay structures
are designed so that the greater the worth of a job (determined
by internal or external equity), the higher the pay grade and
range. At PP, pay program has certain objectives. The principal
ones are as follows:
Internal equity.
External equity (or competitiveness),
Individual equity,
Process equity,
Performance or productivity incentives,
Maximum use of financial resources,
Compliance with laws and regulations, and
Administrative efficiency
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Salary Vs. Wages

Salary is best associated with employee compensation

quoted on monthly / annual basis.

Wages is best associated with employee compensation

based on the number of hours worked multiplied by an

hourly rate of pay.

COMPENSATION FUNCTION

It serves to attract qualified applicants to the organization.

It helps to retain competent employees in the organization.
It serves as an incentive to motivate employees to put forth thei

best efforts.
Minimizing it can also contribute to organizational effectiveness
since it is a significant cost for most employers.

Compensation Strategy
It is an action plan designed to move an organization toward
achievement of its goal / vision.
Generally at three levels
Pay level decisions
Pay structure decisions
Individual pay determination

Pay Level Decisions

High Pay Strategy : Pay higher than average salaries.

e.g. MNC
Low Pay Strategy: Pay minimum level needed to hire

enough employees
e.g. Small enterprises

Comparable Strategy: At the going wage level

modified by cost-of-living or purchasing power.

e.g. Most of the local companies

Compensation Structure
Monetary
Base Pay
Variable Pay
Bonus
Incentive
Stock

options
Non-Monetary (Benefits)
Mandatory benefits
Voluntary benefits

Non-Monetary (Benefits)
Vacation leave
Paid public holidays
Time for personal matters
Sick leave
Maternity leave
Health and life insurance
Medical Aid Schemes
Pension Funds
Employee Services e.g.. Canteens,

social & recreational services

Factors Determining
Compensation Structure
The organization's ability to pay
Supply and demand for labor
The prevailing market rate
The cost of living
Productivity
Trade unions bargaining power
Job requirements
Managerial attitudes
Psychological and sociological factors

What Is Compensation &

Benefits
Compensation is the process of providing adequate
equitable and fair remuneration to the employees both
direct pay (salary and wages) and indirect pay
(benefits programs) in exchange of the work done by
them.
Direct and indirect monetary and nonmonetary rewards
given to employees on the basis of the value of the job,
their personal contributions, and their performance.
These rewards must meet both the organization's
ability to pay and any governing legal regulations.
Employee benefits consist of a large number of diverse
organizational reward offerings
Compensation are of two types: Direct & Indirect

Direct Compensation
Direct compensation is the full monetary

award which fulfills the equity and worth

concept. Its paid to the employees as their
salary, fees or wages.
It includes :
1.cash package( basic, hra, DA, short term

and long term incentives etc.

2.Various Reimbursements (conveyence,
medical bills, children fees etc.)

Direct Compensation
Direct compensation
refers to monetary
benefits offered and
provided to
employees in return
of the services they
provide to the
organization. They
are given at a regular
interval at a definite

Components in Direct
Basic Salary
Compensation
HRA (House Rent Allowance)
CA (Conveyance Allowance)
LTA (Leave Travel Allowance)
Medical Reimbursement
Bonus (Salary Bonus)
SA (Special Allowance)

Indirect Compensation
Indirect compensation includes benefits and

services provided to motivate the employees

to harness best their potentials to fulfill socioeconomic needs.
It includes:
1. benefits and service( holiday homes, club
memberships, credit stores, free
transpostation, medical assistance, legal
assistance, etc)
2.Related social benefits( recognition, learning
opportunities, employment security, etc.)

Indirect Compensation
Indirect compensation refers to nonmonetary benefits offered and provided to
employees in lieu of the services provided
by them to the organization.
Non-cash benefit (such as an office car)
provided to an employee. In some
jurisdictions a certain percentage of the
indirect compensation is added to the
beneficiary's income for taxing purposes.

Components of Comp &

Direct Compensation
Ben
Indirect Compensation
Fixed Pay
Basic
Dearness

Allowance
HRA
City
Compensatory
Allowance
Conveyance
Bonus
Gratuity
Pension
Super Annuity
Provident Fund
LFA
Medical Allowance

Variable Pay
Performance

Link
Incentives
Bonus
Joining
Bonus

Benefits

Leave Policy
Hospitalization
Overtime Policy
Insurance
Retirement Benefits
Holiday Homes
Flexible Timings

Compensation
Basic Pay

Salary is the amount received by the employee in lieu of the

work done by him/her for a certain period say a day, a week,
a month, etc. It is the money an employee receives from
his/her employer by rendering his/her services.
House Rent Allowance

Organizations either provide accommodations to its

employees who are from different state or country or they
provide house rent allowances to its employees. This is done
to provide them social security and motivate them to work.

City Allowance

To meet the expenses in order resort to the

standard of living of the metropolitan city
Special Allowance

Special allowance such as overtime, mobile

allowances, meals, commissions, travel expenses,
reduced interest loans; insurance, club
memberships, etc are provided to employees to
provide them social security and motivate them
which improve the organizational productivity.
Special Allowance helps in balancing the CTC

Provident Fund

Provident Fund is the fund which is composed of the

contributions made the employee during the time he has
worked along with an equal contribution by his employers. It is
calculated as a percentage of his salary, say, 10 % and is
returned to him on his retirement.
Bonus
Bonus is paid to the employees during festive seasons to
motivate them and provide them the social security. The bonus
amount usually amounts to two months basic salary of the
employee.

Leave Fare Allowance

These allowances are provided to retain the best talent

in the organization. The employees are given
allowances to visit any place they wish with their
families. The allowances are scaled as per the position
of employee in the organization.
Conveyance
Organizations provide for cab facilities to their
employees. Few organizations also provide vehicles and
petrol allowances to their employees to motivate them.

Benefits
Medi Claim

The employees should be provided allowances to get

their regular check-ups, say at an interval of one
year. Even their dependents should be eligible for the
medi-claims that provide them emotional and social
security.
Leave Policy
It is the right of employee to get adequate number of
leave while working with the organization. The
organizations provide for paid leaves such as, casual
leaves, medical leaves (sick leave), and maternity
leaves, statutory pay, etc.

Insurance

Organizations also provide for accidental insurance and

life insurance for employees. This gives them the
emotional security and they feel themselves valued in
the organization.
Loans At Concessional Rate
Company also offers loan to its employees depending
upon their designation at concessional interest rate
which is half of the market rate

Equity in Financial
Compensation
Equity - Fair pay treatment for employees
External equity - Firm's employees are paid

comparably to workers who perform similar jobs in

other firms
Internal equity - Exists when employees are paid
according to relative value of their jobs within
same organization
Employee equity - Individuals performing similar
jobs for same firm are paid according to factors
unique to employee, such as performance level or
seniority
Team equity - More productive teams are
rewarded more than less productive groups

Determinant of Individual
Financial
Compensation

Organization typically use a number of factors

to determine individual pay. This decision was
influenced by the
Labor market
Employee
Job
Organization

The Labor Market as a

Compensation surveys
Determinant
of Financial
Expediency
Compensation
Cost of living
Labor unions
Society
Economy
Legislation

Employee as a Determinant
Performance-based
Pay
of
Financial Compensation
Skilled-based Pay
Competency-based Pay
Seniority

Experience
Membership in the organization
Potential
Political Influence
Luck